Does Finance Matter for Growth? The New Growth Theory Facing the East Asian "Productivity Puzzle

This article surveys the last decade of theoretical literature on the finance-growth relationship developed within the Endogenous Growth Paradigm. This literature offers a conceptual framework whereby finance matters for growth mainly through its impact on Total Factor Productivity (TFP) growth, while savings and investment ambiguously respond to financial development. This main result strongly contrasts with the fact that the most successful growing economies of the last four decades have experimented high savings and investment rates but not high TFP performances, a result known under the “East-Asian Productivity Puzzle”. Taking this paradox has a starting point, our paper makes two basic claims. First, progress towards a more comprehensive analysis of the role of financial factors requires an accurate assessment of the causal relationship between capital accumulation and technological change in development processes. Second, finance may matter for growth mainly through its causal role in specific episodes of growth regimes shifts